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Financial Performance of Commercial Banks in Kenya

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Financial Performance of Commercial Banks in Kenya (| MERGER RESTRUCTURING AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA PRESENTED BY CHESANG, CAROLYNE J - D/6 l/P/8495/98 A Research project submitted in partial fulfilment of the requirements of the masters Degree in Business Administration. FACULTY OF COMMERCE UNIVERSITY OF NAIROBI APRIL, 2002 DECLARATION I declare that this project is my original work and has not been presented lor a degree in any other University Signed 04 Chesang, C.J Candidate This project has been submitted for examination with my approval as the l niversity Supervisor. Signed: A. kithinji Lecturer Department of Accounting Faculty of Commerce UNIVERSITY OF NAIROBI DEDICATION This paper is dedicated to my parents, brothers and sisters, my sister’s family (The Tiren’s) and my fiancee, Eliud. COD BLESS VOU. I ACKNOWLEDGMENT The M B A programme has been a long and taxing journey, the successful completion of which has been the result of the support and encouragement received from many quarters. I am indebted not only to people who gave me the inspiration to take up this MBA programme but also to those who gave me the guidance and assistance on what I have reported here. Special thanks go to my supervisor, Mrs. Angela Kithinji, Faculty of Commerce, Department of Accounting for her continued advice, guidance, availability, encouragement, useful criticisms and suggestions through the project work. Without her meticulous guidance this project would not have materialized. I also wish to thank all the teaching, administrative and support staff of the faculty for their unrelented support through the programme period. I also want to recognize m y 1998 - 200 0 M BA class for their companionship and audience throughout the MBA programme. I cannot forget my colleagues; j. Kabiru, E. Kokwaro, V. Obare and Mr. B wire for their useful interactive discussions and encouragement, my workmates at KNH and Harambee Avenue branches for their continued encouragement. Special thanks to my employer; NBK without whom I would not have managed to enrol in the programme. M y family, The Tiren’s family who patiently and conscientiously guided and encouraged me. I specially also want to thank my fiancee, Eliud for his support and encouragement. Vou were very resourceful. Those who assisted me with the typing; Susan, Lilian, my niece (Eva) and Njeru who assisted in m any ways. All those who in one way or the other gave me support. Please receive my heartfelt thanks. May God bless you all abundantly. I would not have managed through my own efforts were it not for you. O ur God Almighty made all these possible. M ay His name be praised! II TABLE OF CONTENTS PAGE Dedication........................................................................................................................ I Acknowledgement..........................................................................................................II Abstract....................................................................................................................... VII CHAPTER ONE INTRODUCTION 1.1. Background..........................................................................................................1 1.2. Statement of the Problem...................................................................................3 1.3. Objective of the Study.........................................................................................5 1.4. I mportance of the Study......................................................................................5 CHAPTER TWO LITERATURE REVIEW 2.1. Background of Kenya’s Banking System......................................................... 7 2.2. Banking Crisis.....................................................................................................7 2.3. Bank Restructuring............................................................................................9 2.3.1. Defining Systemic Bank Restructuring............................................... 9 2.3.2. Bank Restructuring Approaches..........!.............................................. 9 2.4. Merger as a Bank Restructuring Approach....................................................11 2.4.1. Bank Mergers............................................................................11 2.4.1.1. Theories of Mergers.................................................................. 2.4.1.2. Empirical Studies on Mergers..................................................15 2.5. Review of Kenyan Literature...........................................................................17 2.6. Measures of Financial Performance................................................................18 2.6.1. Profitability Analysis............................................................................ 18 2.6.2. Capital Adequacy Ratios.......................................................................19 2.6.3. Long-term Solvency............................. 20 2.6.4. Asset Credit Quality Ratios...................................................................20 2.6.5. Interest Rate Risk Position..................................................................21 2.7. Limitations of Financial Ratios........................................................................21 2.8. Earnings and Profit Performance Emphasis..................................................21 III CHAPTER THREE RESEARCH METHODOLOGY 3.1. Research Design 3.1.1. Population...............................................................................................22 3.1.2. Data Collection....................................................................................... 22 3.1.3. Data Analysis...........................................•..............................................22 3.1.4. Assumptions and Interpretations..........................................................23 CHAPTER FOUR 4.0. Data Analysis and Interpretations........................................................................24 4.1. Introduction......................................................... 24 4.2. Trend in Performance...................................................................................... 24 4.2.1. Solvency Ratios.....................................................................................25 4.2.2. Profitability and Earnings Ratio......................................................... 28 4.2.3 Capital Adequacy....................................................................................31 t CHAPTER FIVE 5.0. Summary of Findings, Conclusions, Limitations and Suggestions for F urther Research, Recommendations to Policymakers................................................32 5.1. Summary of Findings and Conclusions...........................................................32 5.2. Limitations of the Study...................................................................................37 5.3. Suggestions for Further Research.................... 38 5.4. Recommendations to Policymakers................................................................. 38 GLOSSARY ............................................................................ 40 REFERENCES ........................................................................ % A P P E N D IC E S..........................................................................*4 Appendix I List of Merged Financial Institutions: 1994 - 2000 Appendix II Ratio Analysis of Merged Financial Institutions Appendix III Charts - Trends in Financial Performance Appendix IV Tables - Performance of the studied financial Institutions in absolute figures IV LIST OF TABLES AND CHARTS List of Tables Table 1. Return on Equity: Net Income to Total Equity Table 2. Return on Assets: Net Income to Total Assets Table 3 Equity Multiplier: Total Assets to Total Equity Capital Table 4. Asset Utilisation: Total Income to Total Assets Table 5. Profit Margin : Net Income [[ before tax ” / d otal Income T%_ Table 6. Long-term Solvency : Total Liabilities / l otal Assets Table 7. Long-term Solvency: Shareholders Funds to Total Assets Table 8. Capital Adequacy: Shareholders Funds to Total Assets Table 9. Total Assets Table 10. Total Liabilities Table 11. Shareholders Equity Table 12. Total net operating Income . Table 13. Net Income before Tax Table 14. Total Deposits Table 15. Total Income List o f Charts 1 - 3. Trend in Commercial Banks Financial Performance V ABBREVIATIONS. CBK Central Bank of Kenya MER Monthly Economic Review NBFI Non Bank Financial Institutions TNB Transnational Bank Ltd NBK National Bank of Kenya Ltd NIC Bank - National Industrial Credit Bank Ltd STD Standard Chartered Bank Ltd IMF International Monetary Fund VI ABSTRACT This study set out to achieve the following objective: Assess the financial performance of Kenyan Banks restructured using the merger approach. Profitability and earnings, capital adequacy and solvency indicators were used to determine implications of merger restructuring'on performance of commercial banks. Secondary data obtained from Financial statements and various publications was used in the study. The data was then analysed with the aid of Microsoft (MS) Excel statistical package. t On financial performance evaluation of the merged institutions, it was observed that though there is improved performance in some cases, the extent of the contribution cannot be said to be significant. The general observation is that other than for indicators with legal requirements by the Central Bank of Kenya (Capital adequacy and Solvency ratios), merger restructuring has not improved
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